Commercial Property News

A new report from Capital Economics has warned there is a strong chance the UK will enter a technical recession, with predictions of a 35% cut in house prices by 2010.

In its UK Economics Update, Jonathan Loynes, chief European economist at the firm, predicts there will only be one cut in Bank base rate (BBR) by the end of this year, but admits even that may prove too hopeful.

He states: “Whether or not the economy actually enters recession, the consequences of the downturn will be severe. Aside from the drop in house prices, unemployment could rise by almost one million by the end of 2010. Meanwhile, government borrowing is set to rise to around £60billion pa, comprehensively breaking the Chancellor’s fiscal rules, while the sterling exchange rate could fall significantly further.”

A plummeting housing market, weakening currency, high inflation and higher interest rates all point to a ‘severe slowdown’ in 2009, according to research consultancy Capital Economics. As a result it has halved its growth estimate for next year from 1% to 0.5%, with growth this year slowing to 1.7%.

Capital Economics warns that the UK is experiencing ‘an abrupt unwinding of the various imbalances that have built up over the last decade or so’. It has long warned that the property market was over-inflated, and now predicts average UK house prices will fall 15% this year and will be 35% lower by the end of 2010.

Capital Economics is headed by Roger Bootle, formerly one of the Chancellor’s ‘wise men’ and now an adviser to the parliamentary Treasury Committee. He has been a vocal pessimist in recent years, warning that the UK economy was overdue for a major correction.

Today’s research note warns that ‘recent news has suggested that things are likely to be even worse than we had previously thought, with a strong chance that the economy enters a technical recession.’

The high rate of inflation means the Bank of England’s scope for cutting interest rates is limited, it warns, perhaps to just one rate cut by the end of the year, though ‘even that might prove too hopeful.’

‘Needless to say, that is bad news for the housing market, where a very sharp adjustment is clearly underway,’ it continues. ‘We have recently revised our house price forecasts to incorporate a fall of 35% by the end of 2010, and the latest dreadful news on mortgage approvals underlines the gloomy outlook.’

Capital Economics rejects suggestions that consumer spending can hold up in the face of falling house prices. ‘Every previous major housing downturn has been accompanied by a sharp slowdown in the growth of household spending,’ it says.  ‘We now expect spending to stagnate next year, but there is a clear risk of outright falls.’

Only when inflation subsides will the outlook improve, Capital Economics believes. ‘Along with lower house prices and a lower pound, this could eventually pave the way for a period of better-balanced growth in the UK economy.’

‘But there is a very painful period of adjustment to get through first.’

Yesterday Seema Shah, Property Economist at Capital Economics noted that house price falls have now extended into an unprecedented eighth consecutive month in June. Commenting on Nationwide's figures, she said, "Junes (0.9% )fall, while smaller than May's tremendous drop, is not an indication that the housing market slowdown is beginning to let up. Firstly, volatility in monthly house price data is not unusual. Secondly, yesterday's Bank of England numbers showed that mortgage approvals have plummeted and are just a third of the level a year ago. They are pointing to further sharp falls in house prices in the months ahead.

"What's more, mortgage interest rates are rising and the economy and labour market look on course for a sharp slowdown. The bottom line is that the housing market is in only the early stages of a deep and extended correction."